image courtesy of www.notafilia.com.br/ historia.html

ECONOMY UNDER THE EARLY SOVIET BLOCK

 When Hungary became a Communist nation it began to implement radical socialist economic changes.  They collectivized farms and transferred industry to state control. Premier Imre Nagy, a Marxist reformer,  attempted to make this system more moderate with his New Course in 1953, which enjoyed popular support but was largely unsuccessful in improving the economic situation. Rival Hungarian Communist Rakosi sabotaged the program, which was already rather weak and made up of half-measures.   Nagy would return in the 1956 revolt, but his reforms soon let the genie-out-of-the-bottle and Hungarian revolutionaries forced Nagy along their more nationalist agenda.

GOULASH COMMUNISM

 The Kadar government, installed by Moscow after the 1956 insurgency was more successful in reform efforts in the 1960s and 1970s.  In 1968 the Kadar government initiated the New Economic Mechanism which attempted to decentralize their planned economy and took steps towards a market-economy. The reforms were undertaken to garner popular support for the Communist Party, and was specifically intended not to undermine the ideology of socialism, but rather to prevent events like the Hungarian Revolution of 1956 (a viable concern considering the Soviet invasion of Czechoslovaki in that same year).  The Kadar government introduced non-socialist elements to the economy and opened up markets to trade with the West is characterized as Goulash Communism, because it is a mixture of ideas rather like the stew for which it is named.
By the 1980s the New Economic Mechanism has produced a second economy by allowing state workers (which everyone had to be under the Soviet system) to take second jobs in the private market. This allowed entrepreneurs to introduce privatization to Hungary, and allowed individual workers to improve their lot and acquire more buying power.  Small businesses were created like grocers, cafes, auto mechanics or clothing stores.

However, Rothschild and Wingfield identify some major flaws with the NEM, which perhaps contributed to the state in 1989 when an estimated 25-40% of Hungarians were below the poverty line, and also to the decision of leaders in 1982 to join the IMF and take aid in return for submitting to IMF guidelines.  Hungary needed such Western loans because their reliance on heavy industry for economic production and their neglecting of consumer good production or importation.  Heavy industry was still favored by the Soviets, who were devoting their economic resources towards keeping up with US industrial output.  As a result, it forced Eastern European nations to buy inferior products in order to keep the industry afloat. Also, workers put less effort into their state-jobs after they started making more money at their second economy jobs through the New Economic Mechanism. Thus the products made by Hungarians while on state jobs reduced in quality which made the nation unable to compete in Western markets. Blue collar workers were unable to benefit from reform, their wages were not raised, and they were not able to purchase the imported Western consumer goods.  So they resented the changes and demanded a return to Leninism. Finally, the second economy depended on self-exploitation, a limited commodity in the Hungarians which they eventually used up.

ECONOMY FROM 1989 TO 2002

In 1989 Hungary, like much of Eastern Europe, entered a new phase of government by making dramatic political and economic reforms.  Hungary created a new constitution with independent political parties and slated new elections. In 1990 the HDF (Hungarian Democratic Forum) introduced radical advances for free enterprise into the economic system and reduced the state welfare system.  They began to sell off former state-owned industries to Western investors as a way of paying off the debts that the Hungarian state had ecrued over the past two decades.  Importantly they also introduced an early bankruptcy law as a way of providing for legal and regulatory institutions to operate as a control in the market economy.  It also eliminated the potential for a moral hazard among investors.

In 1993 difficulties in adjusting to a market economy resulted in an estimated 35-40% decline in industrial and agricultural production, and the Hungarian gradual approach to reform had yet to reform the system. At the end of 2002, 40% of capital in Hungary was controlled by the private sector versus 4% during the 1980s. Now the private sector makes up 80% of the GDP, and private businesses grew 350% between 1989 and 1996. This rapid economic transition  was actually more gradual than that attempted by such former soviet states as Poland and Czechoslovakia, however the process still produced major stresses and proved difficult for the government to sustain.

After the problems of 1993, a coalition government made up of the HSP (Hungarian Socialist Party) and the FFD (Federation of Forum Democracy) replaced the HDF and adjusted some of the social welfare programs.  They also made some tough choices involving macroeconomic stabiliization required for IMF loans and to keep their ascension into NATO and the European Union on track.  This 1995 reform program undertaken by Lajos Bokros  The Hungarian Socialists paid the price in losing the next election to a FIDESZ led coalition, but the reforms they initiated help complete Hungary's transition to an efficient market economy.  Indeed almost 40% of Western Foreign Direct Investment up to 1998 was located in Hungary, and the recruitment of foreign capital through joint venture, tax concessions, ending of some ownership requirements and securing property rights made Hungary an attractive investment opportunity (Kramer, 1999).  Throughout the second half of the 1990s the economic situation gradually improved in Hungary and today it is thought to be the most successful large Eastern European country to adjust to the world economy.

New York Cafe; One of Hungary's more famous businesses (and coffee shops).  Image courtesy of Hopstudios.com

ECONOMY 2002
GDP: 120.9 Billion $US
exchange rate: 275.92 forint/US $ (Jan 2002)
exports: precision instruments, buses, pharmaceuticals, ready-made garments, leather footwear, canned and raw meat products, canned vegetables, fruits, and wine
imports: crude oil, natural gas, minerals, synthetic fibers, semi-finished goods, trucks, and passenger cars
About 2/3 of land in Hungary is under cultivation. Natural resources in terms of mineral deposits are minimal. Although now heavily involved in engineering and chemical industries, Hungary is historically an agricultural society. This made changes to and from collectivization of farms and agricultural innovation especially important to the state of the nation.
Today privatization of banks and other companies continues. Hungary joined NATO in 1999, and is expected to join the European Union shortly. The GDP grows at 3.9% annually. Hungary is a full participant in the world economy. An estimated 60 to 70% of all private assets have been acquired by foreign investors.

Sources:
Joseph Rothschild and Nancy Wingfield, Return to Diversity, 2000 revised (Oxford University Press:  New York, Oxford)
Mark Kramer, The Changing Economic Complexion of Eastern Europe and Russia:  Results and Lessons of the 1990s, "SAIS Review," 19.2, 1999.
www.sjsu.edu/faculty/walkins/hungary.htm
www.zoltech.net/h/history.html
www.newnations.com
www.cia.gov
www.business2hungary.com (website of the Hungarian Trade Commission)